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(CNS): In a complex legal ruling, a Grand Court judge has found largely in favour of financial services group, Maples, after it challenged the regulator, CIMA, over new rules surrounding the recording of clients’ details under regulations rolled out in 2020 as part of the enhanced local anti-money laundering regime. The ruling comes against the backdrop of Cayman’s battle to get off the FATF grey list, and government officials have said an appeal is being considered.
In 2020, following an on-site inspection at both Maples Corporate Services Ltd and MaplesFS Ltd, CIMA issued a report in which it concluded that the two entities had failed to properly meet their AML obligations in some areas.
But the Maples Group sought a judicial review of how the new rules were being interpreted, in particular clarifying the application of Regulation 12 of the Anti-Money Laundering Regulations (2020 Revision). Maples argued that CIMA had gone beyond the basic legislation relating to anti-money laundering and had misinterpreted the regulation, which was disproportionate and commercially onerous.
While the court stressed its understanding of the “genuine and well-founded concern” about the importance of strengthening the Cayman Islands financial system and the rigorous approach CIMA had adopted in carrying out its statutory duties, Justice Ian Kawaley, who heard the case, said the regulator should have been more flexible over disagreements that arose during the inspection process.
“In my judgment flexibility ought ideally to be the norm because the statutory framework is clearly based on the notion that FSPs will primarily regulate themselves on an individual basis and/or through the Supervisory Authorities of DNFBPs designated under Regulation 55B of the AMLRs, with enforcement action a last resort,” Justice Kawaley found. “The Guidance Notes themselves clearly suggest that FSPs are expected to exercise their own judgment in relation to both risk assessment and CDD measures deployed.”
In the more than 100-page technical ruling, the judge sided with Maples on five out of the seven issues that formed part of the judicial review, as he hinted at the overzealous approach and interpretation the regulator had taken over the amount of information it said it needed for Maples to meet its regulatory obligations in relation to all their clients.
Maples argued that the amount of information, such as independent confirmation about the business dealings of all their clients, that CIMA expected it to collect and retain went beyond the actual requirements of the regulations. The Maples Group also contended that CIMA went too far over the need for it to verify that people purporting to act on behalf of its client were properly authorised, as this was based on an erroneous construction of the rules.
CIMA’s claim that the two Maples firms had not checked all of their clients’ transactions was also overstepping the regulations, and the rules did not, as CIMA had argued, require it to establish the source of wealth of all of its clients in every case, the claim stated. Maples also submitted that the regulations do not “create a duty to scrutinize their customers’ third party transactions”, among other issues.
Maples said that as a result of the new regulations, it had made significant investments with a view to complying with the requirements, including a 50% increase in compliance staff. But despite this, CIMA ruled that the firms had still not met all of their compliance obligations.
However, the judge found that the literal meaning of “obtain information on” as written in the regulations doesn’t necessarily include an obligation to maintain a record of the information obtained or independent documentary evidence to substantiate that information in every case.
The judge indicated that CIMA had adopted a construction removed from the literal meaning of the statutory words without any compelling justification. This, the court found, risked creating uncertainty in the marketplace over how the rules were being applied, as he quashed the regulator’s findings.
He found that CIMA had also taken an “overly prescriptive and rigid construction” of provisions intended to be sufficiently malleable and adapted to the particular circumstances of the business relationships they related to.
The decision by the judge to largely quash most of the content of CIMA’s report on the Maples firms and the claimed compliance failings has caused concern for CIMA and the government. CIMA had applied to the court to keep the judgment under wraps because of the potential impact on the current efforts to remove this jurisdiction from the FATF grey list.
But as CIMA did not give a specific reason as to why publishing the judgment would cause further damage to Cayman’s delicate international regulatory position, the judge ruled in favour of open justice and allowed the publication of his decision.
In a statement following the release of the ruling, the Ministry of Financial Services and Commerce said that the judicial review challenged “the way in which decisions by public bodies have been made” but not necessarily the decisions themselves. “[T]he judicial review process demonstrates the Cayman Islands’ respect for the rule of law,” officials said. “CIMA is considering its options, including the option of appeal, in response to the ruling.”
The judgment was confined to specific AMLR provisions, the ministry said in its response, and while it was awaiting further outcomes in relation to the judicial review, it thanked the regulators and industry for supporting compliance in the jurisdiction.
A spokesperson for Maples told CNS that the case was about clarification, and they were grateful to the court for its assistance with the interpretation and application of the regulations.
“The Maples Group takes regulatory compliance matters very seriously with Group entities regulated in a number of jurisdictions,” the spokesperson said. “The Group is fully supportive of the work of the Cayman Islands Government and the Cayman Islands Monetary Authority in protecting and enhancing the integrity of the financial services industry of the Cayman Islands.”
See the ruling and the order regarding publication in the CNS Library.
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